The five factors driving Asian financial M&A

Financial services firms could consolidate a lot more in 2016. EY identifies five M&A trends.

Enormous amounts of heat and pressure can dramatically change the most solid geological formations. Similar tensions are causing transformations in Asia’s financial services landscape.

Increasingly stringent regulations, volatile economies, tougher competition and shifting technology are forcing banks and insurers to consider how best to reshape their businesses to suit this changing environment.

It isn’t easy. Companies are often underprepared for deals, with poor data clouding value assessments, and lacking preparedness for separation issues including carve-outs of financial data.

EY has identified a set of themes that are likely to underpin M&A in the financial services sector in 2016. Companies seeking to benefit from this volatile period might want to consider these possibilities as they plot their strategies for the coming year.

1. Expect a buyers’ market

Financial services executives often lament having held onto certain assets for too long, but they appear to be learning. Several major players are becoming willing to exit non-core investments, offering acquisition opportunities for Asian buyers.

EY predicted in 2015 that acquirers needed to understand local dynamics and put them into a regional context. But market volatility during the year led many would-be divestors to wait for better conditions and more clarity over their own capital positions before selling assets.

This will likely change in 2016, as more international companies decide the positions they hold in Asia are too small or costly.

“International financial services companies used to like making minority investments in regional companies to extend their reach,” says Charlie Alexander, partner responsible for financial services sector transactions across Asia-Pacific at EY. “But new capital rules make such positions capital-inefficient. Now it’s often better for companies to divest such assets and recognize the upside or downside in value on disposal.”

Some have sold minority investments at high valuations. For example, Deutsche Bank recently agreed to sell its 20% stake in Beijing-based Hua Xia Bank to Chinese insurer PICC Property and Casualty for up to US$4 billion.

2. Banks to take fintech seriously

Financial technology, or fintech, was the buzz expression across the world’s financial services industry in 2015.

The potential of new, online-based forms of technology to streamline and modernize traditional banking services both excites and frightens financial services companies. Many banks and insurers are supporting fledgling fintech businesses. Others are seeking to buy proven technologies.

“Towards the end of 2015 we began to see banks do more than just discuss acquiring innovative and disruptive technologies, and start to commit themselves, as Australia’s Westpac did piloting SME lending with fintech Prospa and its own fintech fund,” says Alexander.

Financial services institutions in Asia-Pacific are embracing disruptive technologies including blockchain, robo-advice and customer-centric payments platforms. And they are beginning to make such investments directly.

“Previously banks invested into fintech venture capital funding, but this year we expect banks to make more alliances and acquisitions,” says Alexander. “Expect to see fintechs acquiring fintechs and more direct acquisitions by banks and insurers of fintechs. Watch out too for blockchain technology advancements, and the disruption that could bring.”

3. Consider what banks of the future will look like

A tougher regulatory environment is also leading to M&A possibilities.

“Financial institutions are not just thinking about how best to make savings. Increasingly stringent rules have forced bank decision-makers to consider which divisions best offer return on capital,” says Alexander.

Last year, EY predicted banks would explore how to better extract value from their franchise, such as through bancassurance or similar forms of distribution arrangements.

This has been borne out through a tighter strategic focus, with banks increasingly looking at disposals, alliances and capital-light deal structures. Often these deals are small and tactical in nature, with banks often acquiring a small financial institution with a specific skill set or customer base. Alexander thinks more is to come.

“Banks are re-examining the business lines and geographies to be in for the long term and are increasingly trying to future-proof their businesses from the impact of digital and regulatory disruption,” he said.

4. Insurers to focus on winning in their key markets

Asia’s insurance sector is growing fast, but it is also competitive. Margins are under pressure due to high levels of legacy costs and low investment yields. So insurance companies should focus on winning in their key markets before expanding further.

As with banking, embracing fintech can help insurers. “Technology is accelerating mobile and web-based sales, advice and distribution opportunities in the region,” says Alexander. “Insurers should continue to focus on their core while investing in fintech.”

Increasingly, a divide is forming between legacy insurance businesses and forward-looking new companies that use new technology to enable digital customer interaction, technologically enabled pricing and product design, and streamlined processing and settlement.

“This disconnect between the old and the new is likely to drive divestment of back books or entire legacy operations in 2016,” says Alexander.

China also offers a big opportunity, both due to its large potential customer base and the liberalization of its financial system. Insurance companies are likely to invest more into China via Hong Kong, which remains an attractive market for local customers and mainland customers signing contracts while visiting the city.

Hong Kong’s Dah Sing Financial Holdings is reportedly looking to sell its life insurance business for up to US$1 billion.

This continues EY’s theme from last year, when it highlighted that banks with capital to spare had more strategic flexibility. Well-capitalized lenders have been able to pursue larger transformational transactions.

“Banks and insurers from mainland China, Taiwan, Korea and Japan will continue being the likely consolidators or partners of choice for vendors,” says Alexander. “More banks and insurers from mainland China will use Hong Kong as a springboard for outbound investment.”

Chinese companies could continue to lead this development, investing into Europe, the Americas and Australia. “The vulnerabilities at home are leading many Chinese financial services companies to actively seek to build expertise and distribution overseas,” says Alexander. “We also expect to see strong outbound agendas from Korea, Taiwan and Japan into markets across South-East Asia.”

Asia-Pacific focused private equity and venture capital also look set to become increasingly active acquirers and capital providers to financial services companies in Asia, as values fall and equity markets show ongoing volatility and temporary closures.

In summary

The world’s financial markets remain volatile, and hard to predict. Many institutions are reconsidering their market positions. However, the disruption presents an opportunity for financial services companies committed to Asia to grow.

“As global financial services firms continue to exit, opportunities will abound in 2016. But organizations need to better prepare their M&A strategies in order to get best value,” concluded Alexander.

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Member firms of the global EY organization cannot accept responsibility for loss to any person relying on this article.